Nobody likes to make an investing mistake. But inevitably,
you'll lose money from a bad investment. When you do, taking
advantage of capital loss carryovers can help you earn back a
good portion of what you've lost.
As we approach the end of the year, many investors are already
aware of the tax-loss harvesting strategy. By selling stocks that
have lost value, you can lock in capital losses that you can use
to offset income on your 2012 tax return.
Unfortunately, though, there's a limit to the amount of
capital losses you're allowed to use. You can claim capital
losses up to the full amount of any capital gains that you have,
effectively offsetting all of your profitable positions. Beyond
that, you can use up to $3,000 of additional capital losses
against other sorts of income, including interest, dividends, and
even non-investment income like wages.
But as many investors found out during the bear market year of
2008, you'll sometimes have losses that exceed your gains by more
than that $3,000 limit. That's where the rules governing capital
loss carryovers apply, letting you reap tax benefits in future
Figuring out how much of your losses you're allowed to carry
over to future years is relatively simple. Basically, if you have
losses left after you offset any capital gains in a given year
and after you use up to $3,000 to offset other income, you're
allowed to carry them over to the following year.
There's no limit on how many years you can use capital loss
carryovers. Therefore, if your losses are large enough, then it
may take several years to go through all of them even if you have
subsequent gains on other investments.
In order to make the most of your losses, you should consider
some of the more technical aspects of the
rules governing capital losses and gains
. Most of them hinge on whether the capital losses in question
are short-term or long-term.
Short-term losses come from stocks you've held for a year or
less. If you own a stock longer than a year, then any losses on
their sale are treated as long-term losses. Because long-term
capital gains tax rates are lower than rates on short-term gains,
short-term losses can bring you more tax savings -- if you're
smart about using them.
That means that if you bought a stock last November or
December that has lost a lot of money, you should strongly
consider selling it now rather than later, before your losses get
treated as long-term.
are a prime example, with
Alpha Natural Resources
) , and
) all having posted losses of 25% to 75% since late 2011 due to
weak coal demand stemming from low natural gas prices and slowing
economic growth in coal-hungry markets like China. Solar stocks
have been under similar pressure, with
(Nasdaq: FSLR) and
(Nasdaq: SPWR) among the many companies in the industry that have
major share declines
due to big losses and a glut of products.
But there are exceptions to that rule that require some
sophisticated planning. If you have a lot of gains from
short-term holdings but no corresponding long-term gains,
generating long-term losses gives you an unusual but valuable
opportunity. The tax law lets you offset net long-term losses
against short-term gains. That can save you an even larger amount
because of the higher rates that typically apply to those
Conversely, if all you have are long-term gains, you may want
to hold off on harvesting short-term losses. That's because the
same tax law requires you to offset net short-term losses against
long-term gains. That essentially wastes your valuable short-term
losses on gains that wouldn't have cost you as much on your tax
Capital loss carryovers are a silver lining that cushions the
blow of a big loss. By knowing the tax rules, you can ensure that
you'll make the most of carryover opportunities whenever they
First Solar has produced some pretty big losses over the past
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Fool contributor Dan Caplinger likes to cut his taxes. You
can follow him on Twitter @DanCaplinger. He doesn't own shares of
the companies mentioned in this article. Try any of our Foolish
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the same opinions, but we all believe that considering a diverse
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